Understand the pros and cons of FMPs before venturing into them…
10-Mar-2011 •Research Desk
I want to invest in a fixed maturity plan. My criteria for evaluation is a 1-year fixed deposit from ICICI Bank at 8.25 per cent or a 500-day 9.75 per cent deposit from IDBI Bank
— Siddharth Grover
Fixed Maturity Plans (FMPs) have been attracting investors simply because the Certificate of Deposit rates are high. If fund managers buy 1-year CDs at attractive rates, naturally the returns would be reflected in FMPs.
FMPs are closed-end debt funds where investments can only be made during the offer period. They have a fixed maturity horizon which is declared at the outset. Depending on the maturity of the scheme, the fund manager selects debt instruments with identical maturity. They are passively managed with low turnover and transaction costs. However, liquidity is a problem. Though these schemes are compulsorily listed on the stock exchange, it’s not easy to exit a scheme before maturity as there are few buyers. So ensure that you are pretty certain you will not need the money for the duration of the FMP.
Like any market-related product, there is no guarantee of principal or return. In the case of a bank fixed deposit, you know exactly how much you are getting.
Where FMPs score over bank deposits is in the nature of the tax treatment since long-term capital gain is taxed at 10 per cent without the benefit of indexation, or 20 per cent with the benefit of indexation.
The Securities and Exchange Board of India (SEBI) no longer permits mutual funds to announce indicative returns.